Filing summary
Entity and period: The supplied filing is Western Gas Equity Partners, LP’s Form 10-K for the fiscal year ended December 31, 2014—not a filing for Western Midstream Partners, LP, and not a quarterly report. WGP’s consolidated statements include Western Gas Partners, LP (WES). WGP has no independent operations or material assets beyond its interests in WES, so the results below largely reflect WES.
Business context and reporting period
WES gathers, processes, treats and transports natural gas, condensate, NGLs and crude oil across several U.S. regions. At year-end, WGP held 34.9% of WES’s limited partner interests, its 1.8% general partner interest through WES GP, and all WES incentive distribution rights. Anadarko owned 88.3% of WGP and remained a major WES customer and affiliate.
Financial and operating metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Revenue | $1.274 billion | $1.030 billion | Up 23.7% |
| Operating income | $448.3 million | $317.1 million | Up 41.4% |
| Net income attributable to WGP | $221.9 million | $159.7 million | Up 38.9% |
| Net income per WGP common unit | $1.02 | $0.71 | Up 43.7% |
| Cash from operating activities | $531.0 million | $444.8 million | Up 19.4% |
| Cash used in investing activities | $2.622 billion | $1.653 billion | Greater investment outflow |
| Cash from financing activities | $2.045 billion | $898.7 million | Up substantially |
| Total assets | $6.752 billion | $4.631 billion | Up 45.8% |
| Long-term debt, carrying value | $2.423 billion | $1.418 billion | Up $1.005 billion |
| Cash and cash equivalents | $67.2 million | $113.1 million | Down $45.9 million |
Operating margin was approximately 35.2%, compared with 30.8% in 2013. WES’s non-GAAP distributable cash flow was $531.1 million, up 39.6%; its distribution coverage ratio was 1.20x. WES reported $408.6 million of cash distributions to unitholders during 2014. WGP declared distributions of $1.125 per unit for 2014, including $0.3125 for the fourth quarter; WES’s fourth-quarter distribution was $0.70 per unit.
WES’s natural-gas throughput attributable to WES rose 9% to 3,493 MMcf/d; crude/NGL throughput increased to 116 MBbls/d from 40 MBbls/d. About 80% of WES gross margin was fee-based, and 99% was from long-term fee-based contracts or commodity-exposed contracts hedged with swaps.
Material changes versus the prior year
- WES acquired Delaware Basin Midstream (DBM) in November for a preliminary purchase price of approximately $1.554 billion. The acquisition added gathering, treating and processing assets in the Delaware Basin; it contributed only $12.5 million of revenue after acquisition during 2014.
- WES acquired interests in the Texas Express Gathering and Pipeline systems and Front Range Pipeline in March. The acquisitions and new infrastructure helped increase equity income and crude/NGL throughput.
- WES funded growth with equity, Class C units, notes and revolver borrowings. It issued $750 million of Class C units to an Anadarko subsidiary for the DBM acquisition, raised $603 million net in a public equity offering, and ended the year with $510 million outstanding under its revolving credit facility.
- WES’s cash investment outflow rose primarily due to DBM, the TEFR interests and capital projects. Capital expenditures were $672.8 million, compared with $645.9 million in 2013.
- WES reported $3.1 million of asset impairments, versus $1.2 million in 2013. Goodwill rose to $384.4 million, including $279.1 million recorded for DBM; the annual test found no goodwill impairment.
Outlook, risks and unusual items
- Outlook: No formal earnings guidance is provided. Management expected lower crude prices to prompt WES customers, including Anadarko, to reduce 2015 capital spending versus 2014. WES planned to focus spending on attractive opportunities and maintain liquidity. Lancaster Train II, designed for 300 MMcf/d, was expected in service in Q2 2015, with a 10-year fee-based contract and 200 MMcf/d throughput guarantee. DBM Trains IV and V were expected in 2016.
- Commodity exposure: Swaps for Hilight, Newcastle and Granger expired without renewal at year-end 2014. DJ Basin and Hugoton swaps were due to expire in June and September 2015, respectively. Renewals on similar terms were not assured.
- Customer concentration and conflicts: Anadarko accounted for 76% of WES revenue and 53% of throughput on the stated measures. WES also held a $260 million, 30-year note receivable from Anadarko, bearing 6.5% interest. Affiliate transactions, common control and potential conflicts of interest are significant considerations.
- Liquidity and leverage: WES had a $27.3 million working-capital deficit, $677.2 million available under its $1.2 billion revolving facility, and a 5.0x maximum leverage covenant (temporarily 5.5x following certain acquisitions). It reported covenant compliance at year-end.
- Legal and environmental matters: A WES subsidiary was negotiating with the EPA over alleged Clean Air Act leak-detection and repair noncompliance at the Granger facility; management considered a penalty above $100,000 reasonably likely but could not predict the outcome. WES also faced DCP litigation concerning gas dedication agreements; management did not expect a material effect and intended to defend the case.
- Other risks: Risks include lower commodity prices and producer activity, regulatory and environmental changes, pipeline safety costs, acquisition execution, third-party infrastructure and counterparty performance, and potential impairment. Management and KPMG reported effective internal controls; KPMG issued unqualified opinions on the financial statements and internal control, while the acquired DBM entity was excluded from the 2014 internal-control assessment.
Most important facts for investors to verify
- Confirm the issuer: this is WGP’s 2014 Form 10-K, with WES consolidated—not a Western Midstream Partners, LP filing.
- Review DBM’s final purchase-price allocation, integration and subsequent throughput and cash-flow contribution; the reported allocation was preliminary and relied on Level 3 estimates.
- Track Anadarko’s financial condition, production and capital plans, given WES’s customer concentration and the affiliate note receivable and hedging arrangements.
- Check swap renewals and actual commodity exposure after the 2014 and 2015 expirations.
- Assess debt growth, revolver availability, covenant headroom, distribution coverage and the funding required for ongoing construction and distributions.
- Monitor the EPA matter, DCP litigation, pipeline and environmental regulation, and any subsequent impairment indicators.